Today I want to show a chart that would define ‘poised to move up' but has not already made 25% rather than a chart with downward momentum like the CNQ chart illustrated last week. This is really a direct comparison to the blog I did on CNQ.TO to explain the differences when the chart is looking better.
Lets look at XLU. This is the ETF for the utility stocks in the US. It combines lots of companies of significant size. We know it has been underperforming the overall market. So how can we tell it is trying to turn higher?
First of all, you will notice if utilities were falling out of favor in this recent rally, it is not obvious by looking at price only on one chart. How do we know if it outperformed the market, trailed the market, kept pace with the market? We need to review the stock in several different contexts. We'll discuss price action farther down, but let's focus on the RSI. Never dipped below 40 so that is a strong indicator of support. It is just hovering at the flatline of 50, with no real push either way.
The SCTR ranking is really working well on these charts. Look at the recent outperformance on the SCTR. While the stock market wobbles at these levels, renewed interest is showing up in the SCTR. I mentioned last week that consumer staples and utilities were slowing the decline or basing in relative strength.
Lets move on to price. The XLU dropped quickly in price and then flat lined. This flatline is a very interesting pattern. It does not have enough buying pressure to move the market higher, but no one is selling into weak demand. All parties are comfortable would be another way to say it. Notice how the Bollinger band width, denoted by the blue arrows, are very narrow. The calm before the storm. The Bollinger Bands use the amount of movement over the last 20 days. Almost none so narrow Bollinger Bands are the result. BB's usually pinch at major turning points.
The next piece of data on the price chart is the purple SPURS. The relative strength compared to the SPX. You will notice that it too indicated a small turn in strength. So even if the utilities and the SPX - both- pull back, the SPURS line will tell you if the Utilities are pulling back more than the SPX index. This purple line usually moves up as the market pulls back. So, in reality what happens, the large funds move money into Utilities and out of high growth investments. If you are trying to outperform the index, this rotation into stable dividends is usually a good idea when utilities are outperforming the market. As soon as the high growth seems to be more attractive, selling utilities and buy high growth causing the purple line to move down.
Onto volume, the volume has been low on everything, so it is hard to see. The volatility of the market is down substantially as well, so then the computers that auto-trade stocks don't have as much movement, so these systems go quiet as well. Quiet volume...No real data to help us.
Under that we have the MACD. Now the MACD is a very interesting comparison of 2 different moving averages. How it plays out on the chart can show us rising or falling momentum. Well, you can see that the MACD is flat at zero because all the moving averages for the MACD produce the same answer based on no movement in price for the different moving average periods.
The force is a function of volume and price, so it is not giving us a clue either way as neither are moving.
The ROC indicators are showing us the rate of change. The green line is falling because 44 days ago we had higher prices that are coming off and the new prices are lower than 44 days ago so it trends down. The two short term ROC indicators are above/at zero. If the price 44 days from roughly Jan 8 has not changed over the next 10 days, the green ROC is likely to oscillate back up to zero. If the price starts to rise in the XLU, then this green line will start to move higher,as will both the 11 and 22.
When all of the ROC lines and the MACD lines are moving above zero from below, that is usually a nice entry. It is not as good for exiting your position when they cross below. It is usually too slow.
So this chart is giving us 3 or 4 signals that make it worth watching closely.
- The SCTR starts rising.
- The SPURS starts rising.
- The RSI moves above 50
- The MACD and the ROC turn up from the current ‘hovering near zero' and make a move. This last one has not happened yet.
The important move is that the SPURS and SCTR are both breaking downtrends. Should the price start to break out, this would tell us money is moving into defensive stocks and we should get more cautious with our high growth stocks.
Lots of good things are happening on strong stocks. It's important to know when to take profits. The example I like to use is Microsoft because everyone knows who that is. It was a darling in the 1990's. I am sure no one would have believed it would lose 70% of it's value in one year and never make it back. The intent of watching other indicators is to help sense the overall market.
The recent blog on the Utilities was an example.
The price action on CNQ was another example.
The Dow Theory article was another example.
Using $Copper was another example of how to spot changing times.
The ratio chart of the Dow compared to other indexes is another example.
Using the $USD to help understand commodity movements is another example.
This is another example of a chart in early warning stages.
Technical analysis is about probabilities. LULU and AMZN both illustrated similar weak charts a while back. LULU made a significant breakout to the upside and recovered. AMZN still has not. So trend and price action is very important. Each week adds a piece to the puzzle. If you believe $Copper is topping, go look at the mining stocks or $COPPER and use these settings for the chart. Find your own settings and signals.
Then look back to see how your stocks reacted each year based on the indicators since 2000. It has been a widely swinging market and the use of indicators/oscillators has never been more relevant.
Additionally, the SCTR is still relatively new. I am trying to find when the rankings change from basing to an investable turn. Sometimes its a turn above, 10, 30, 50? Feel free to send me some of your suggestions on how you use the SCTR to help in performance.
Hopefully all of this helps with some of your trading plans. Feedback wanted!
Good trading,
Greg Schnell, CMT.
